Fresh Doubt Over the Bailout of A.I.G.

GRETCHEN MORGENSON wrote in the DEC. 20, 2014  New York Times

 “The government is on thin ice and they know it,” a lawyer representing the Federal Reserve Bank of New York wrote in a private email on Sept. 17, 2008, as the federal bailout of the American International Group was being negotiated. “But who’s going to challenge them on this ground?”

Well, as it turned out, Maurice R. Greenberg would.

Mr. Greenberg, the former chief executive of A.I.G. — the insurance company whose failure threatened to bring down much of the global financial system with it — is not the most sympathetic figure. But the lawsuit he has brought on behalf of Starr International, a large stockholder in A.I.G., seeking compensation for shareholder losses during those crucial days of the financial crisis, raises troubling issues.

In a 37-day trial that ended in late November, Starr contended that the government’s actions in the bailout, including its refusal to put some terms of the rescue to a shareholder vote, were an improper taking of private property under the Fifth Amendment. It is seeking at least $25 billion in damages on behalf of A.I.G. shareholders. The judge is expected to rule on the case next year.

Henry M. Paulson Jr., secretary of the Treasury at the time and a former Goldman chief, was instrumental in hiring Mr. Liddy, with help from other current and former Goldman executives.

The government rejected Starr’s accusations, contending that its rescue of A.I.G. kept the company from disaster and that A.I.G.’s board agreed to the bailout terms.

Those backing the government are indignant over the case. A.I.G. shareholders did well in the bailout and should be grateful for it, they say. And all’s well that ends well, right? A.I.G. repaid its $182 billion rescue loan in 2012; the government generated a profit of $22.7 billion on the deal.

To me, however, the case’s significance lies in the information it unearthed about what the government did in the bailout — details it worked hard to keep secret.

And new documents produced after the trial seem to bolster Starr’s case, casting doubt on central testimony by some of the government’s witnesses.

The new elements include emails written by the New York Fed’s lawyers during 2008 and 2009 that had been subject to attorney-client privilege and were not produced during the trial.

Starr’s lawyers argued that the government’s legal team had knowingly waived that privilege when they put the Fed’s lawyers on the stand at trial; the judge agreed and ordered the government to produce 30,000 new documents.

A Dec. 8 court filing made by Starr included emails from this trove.

Some relate to the actions taken by the government to gain control of A.I.G. without receiving approval in a shareholder vote. The vehicle set up by the government to complete the bailout received preferred stock in A.I.G.

The problem the government faced was that Mr. Greenberg, voting his sizable stake, could have thwarted the deal.

At trial, the government argued that it had not tried to circumvent the A.I.G. shareholder vote. But documents from early on in the rescue show the government’s lawyers discussing how to do just that.

“Ideally we should have the pref issued before they realize that we are going to do it w/out a SH vote,” a government lawyer wrote on Sept. 19, 2008. Three days later, a lawyer for the New York Fed wrote, “I would give a lot to find a way to take the stock before the shareholder war machine moves.”

There’s also the matter of whether the New York Fed had legal authority to receive the 80 percent equity stake in A.I.G. in exchange for an initial $85 billion loan. A.I.G. was the only financial company rescued in the 2008 crisis that surrendered equity to the government.

Edward Liddy was named A.I.G.’s chief executive on Sept. 18, 2008, but he remained a Goldman Sachs director until Sept. 23. Credit Chip Somodevilla/Getty Images

During the trial, Fed officials contended that they had no doubts about their authority to take shares. But according to the email written by Randall Guynn of Davis Polk & Wardwell, the lawyer who worried about being on thin ice, the Fed knew that it had no “express authority” to acquire an equity interest in A.I.G.

Finally, testimony during the trial shed new light on how Edward Liddy became A.I.G.’s chief executive under the bailout.

Mr. Liddy, a former C.E.O. of Allstate, had been a member of the board of Goldman Sachs since 2003 and head of its audit committee since 2007. He held “a considerable amount of Goldman stock” when the bailout took place, testimony shows.

It was well known before the trial that Henry M. Paulson Jr., a former chief executive at Goldman who was the Treasury secretary at the time, was instrumental in hiring Mr. Liddy for the A.I.G. post. But the extensive involvement by other current and former Goldman executives in his selection was not.

This involvement was remarkable: Goldman, after all, was one of A.I.G.’s largest trading partners and one of the biggest beneficiaries of the insurer’s bailout. Goldman received $13 billion when the New York Fed, under Timothy F. Geithner, paid A.I.G.’s trading partners in full on credit insurance they had bought from it.

According to Mr. Liddy’s testimony, Chris Cole, co-chairman of Goldman’s investment banking unit, was the first to contact him about the A.I.G. job. Mr. Cole was working on a private-sector rescue of A.I.G. and called Mr. Liddy the morning of Sept. 16, 2008.

Later that day, testimony shows, Ken Wilson, Goldman’s former vice chairman and an adviser to Mr. Paulson at the Treasury, repeated the offer to Mr. Liddy. He accepted it. Mr. Paulson then telephoned Mr. Liddy around 3 p.m. to discuss the matter.

That evening, the bailout was completed at the New York Fed.

Early on Sept. 17, Mr. Liddy met with Dan Jester, another former Goldman executive advising Mr. Paulson at the Treasury. A Sept. 17 email from Mr. Cole to a Goldman colleague indicates that he had met with Mr. Liddy for four hours.“Getting him prepped for his first day on the job,” Mr. Cole wrote. “His chin strap is fastened.”

At the trial, Mr. Liddy testified that he didn’t recall meeting with Mr. Cole. A spokesman for Mr. Cole said last week that he declined to comment.

Mr. Liddy was appointed A.I.G.’s chief executive on Sept. 18. But he remained a Goldman director until Sept. 23, and he testified that he attended a Goldman board meeting by telephone on Sept. 21. At that meeting, the company’s directors voted to become a bank holding company to receive additional government support.

Later that evening, Mr. Liddy led an A.I.G. board meeting, notes produced at trial show. He urged the insurer’s directors to accept the government’s costly bailout because it “was not going to come to the aid of other troubled issuers and turmoil was expected,” the notes state.

Last week, Edward Kane, a finance professor at Boston College and an expert on financial regulatory failures, said, “We’ve learned so much from this case that everyone wanted to cover up.” Mr. Kane said that while he is not on Starr’s side in the litigation, the facts that it has surfaced are important for citizens to understand.

“These are the equivalent of storm troopers marching in and throwing their weight around and telling lies about it afterward,” he said. “The lawsuit is an effort to make these people accountable that has not been available through the political system.”

A version of this article appears in print on December 21, 2014, on page BU1 of the New York edition with the headline: Fresh Doubt in the Bailout of A.I.G.. Order Reprints| Today's Paper|Subscribe